Posted: May 24th, 2022
Acquiring a Company
Over the last several years, globalization has been having profound impact upon how various revenues are being accounted for. This is because there has been a concentrated effort, to create a universal accounting standard that can be utilized around the world. In the case of SolvGen and Careway, this could mean that possible changes may have an impact upon how various revenues are reported. To determine the underlying effect that this will have on both companies requires: examining the deliverables arrangement, when milestone payments should be recognized as revenues and if IFRS changes will have an impact upon the way this is recorded. Together, these different elements will provide the greatest insights, as to how these changes will affect SolvGen and Careway.
What are the deliverables for the arrangement described in the case study above?
Under the agreement the deliverable for SolvGen include: Commercial launch of instrument system Version 1, Commercial launch of instrument system Version 2 and Commercial launch of instrument system Version 3. The deliverables for Careway are the ability to market / distribute the different drugs that are being produced. This is important, because it is showing how both companies will have actual products that they will have to account for (based upon multiple streams of revenues). (“Revenue Recognition,” 2009) (“Case 10 -1,” n.d.)
When should the milestone payments received to date by SolvGen be recognized as revenue?
The different milestone payments should be recognized as revenues in the quarters that the income was received. For example, SolveGen has two milestone payments (the exclusive negotiation payment and contract signing payment). The exclusive negotiation payment was received in December 2005, while the negotiation payment was received in January 2006. As a result, the exclusive negotiation payment would be reflected in the quarterly earnings of the company for the fourth quarter of 2005. The negation payment will be reflected on the first quarter earnings of 2006. This is important, because under FASB guidelines all milestone payments must be reflected in the quarter that they were received (to provide the most accurate information to shareholders and regulators). (“Revenue Recognition Milestone Method,” 2010) (“Case 10 -1,” n.d.)
Would your answer to the first requirement change under IFRSs? Explain your rationale supported by the guidance.
No. Under IFRS guidelines all of the deliverables are must be reflected as actual revenues in the quarter that they are received. This includes all of the various streams of revenues that are generated off of each deliverable. In the case of SolvGen, this means that their deliverables will be reflected during every quarter they are receiving any kind of income from it. Evidence of this can be seen by looking at various guidelines provided by the FASB. Where, it says, “In the year of adoption, vendors will be required to disclose information that enables users of its financial statements to understand the effect of adopting these in this update.” (“Revenue Recognition,” 2009) This is important, because it confirms how the new changes under IFRS standards will not have an impact upon the way different revenue streams are accounted for. As far as Careway is concerned, they are not receiving any kind of income from this transaction until the final drugs have been approved for sale to the general public. Therefore, they will not have to list any kind of income that they are receiving until this time.
Clearly, the new standards will have an impact upon how deliverables and milestone payments are reported. Where, they will be listed as actual revenues received in the quarter when payment was made. In the case of the IFRS changes that are being proposed, this would have no impact upon the way this is accounted for. This is because this basic standard is requiring all companies to report: their different deliverables and milestone payments in the quarter that they were received. Therefore, this will have no impact upon how these revenues are being recognized by both organizations.
Case 10 -1. (2006).
Revenue Recognition. (2009). FASB. Retrieved from: http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175819938544&blobheader=application%2Fpdf
Revenue Recognition Milestone Method. (2010). FASB. Retrieved from: http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820624057&blobheader=application/pdf
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